I should begin by telling you that as I write this I have my browser open to the website of The Guardian because, quite literally, there are updates every few minutes on the exceedingly dynamic crisis between the Eurozone (EZ) and Greece. Throughout the day, as much as possible, I will add updates at the very bottom of this diary. Finally, I (aka Arliss Bunny) am the Finance News and Monetary Policy Burrow Chief for Netroots Radio and on The After Show I have covered the topic of Greece several times in recent weeks including here and here. I also went into great detail today regarding the developments of the past week. That podcast will be posted around 8PM EST today and I will add the link here when it is available. Will McLeod covers the political side of Greece on The After Showhere and here. Will combines both passion and knowledge so his podcasts are not to be missed.

Keep hopping for background and a play-by-play round-up of events which I have named, “As the Euro Turns.” It is an incredible story full of drama and suspense so join me. I do recommend taking a break right now to get a snack as it’s going to be a long read.

[Speaking of “snack,” I discovered this week that there is a World Carrot Museum. A CARROT museum…!!! BEST. THING. EVER.]

Background

It is easy to think of Greece as a small country and it is but as deflation rises and austerity continues throughout Europe, Greece finds that it is not as alone as one might imagine. Greece, Spain and Italy collectively have a population of 100 million which is one-third the population of the entire Eurozone. In Spain and Italy, in particular, upcoming elections are favoring the anti-austerity parties and current governments have not failed to notice. On 24 January, the day before the Greek elections, the leader of Podemos, the one year-old anti-austerity party now leading in the polls in Spain, made a speech that should have kept all the austerians in the EZ awake all that night and the next as well. The current government in Italy has also been signaling ever-closer sympathy for Greece. Even in Portugal, Ireland and France, where the governments remain pro-austerity, the people and opposition parties are increasingly eschewing austerity. Loudly.

If you have not been following the Greek crisis, here are some general statistics that will baptize you instantly into the “Wow! It’s hard to believe the EZ could be so wrong and STILL remain unwilling to drop austerity” club. Since the imposition by the Troika (the European Central Bank, aka the ECB, the International Monetary Fund, aka the IMF and the European Commission aka EC) of starvation austerity onto Greece, the Greek gross domestic product (GDP) has fallen by 25%, general unemployment has risen to 26% and youth unemployment has skyrocketed to 55%. Even more chilling, of the €254.4bn in loans from the Troika between 2010 and 2014, €29.3bn has gone into Greek operating needs and the Greek contribution to the EU stability mechanism while the other €225.1bn has gone to pay debt. So, of the loans made to Greece, only 12% has gone to the citizens of Greece. The rest has gone to pay German, Dutch and Austrian banks as well as the Troika. When you hear people talking about a Greek bailout they could not be more wrong. This is a bailout of the creditor banks, pure and simple and it means that German Prime Minister Angela Merkel has a €320bn gun to her headso how ever tough she wants to sound, Greek bankruptcy and Greek exit of the Euro (known as “Grexit) would splash her sticky, bloody brains all over Germany. Don’t imagine, whatever the rhetoric, that Merkel is unaware of the consequences.

On 25 January, by huge margins, the Greek people put a new party, SYRIZA (it’s an acronym) into power and while SYRIZA is called a “radical leftist” party they actually are not. They are a center, progressive party. What makes them seem “radical” to the northern Eurozone is that they have accepted and proclaimed the reality that austerity does not now and will not ever work…in Greece or anywhere else. Also widely misunderstood, SYRIZA does not want to leave the euro or the European Union (EU). They simply want the freedom to implement proven growth strategies (rather than disproven austerity) in order to reverse the destruction of their economy.

The new Prime Minister of Greece is Alexis Tsipras and I love this quote from him,
“(my party) is not a ‘threat to Europe’ but instead a force for change in its policy direction.” Tsipras and his Cabinet are planning to lead not only Greece but to blaze a path for other seriously jeopardized EZ member nations…and THAT is why the Germans fear him. Tsipras is, btw, a thoughtful, dynamic, strategic thinker and deserves an entire dKos diary dedicated to him and to the rise of SYRIZA. That will, however, not be a diary written by this rabbit as I am more of a monetary policy wonk than a political junkie.

The new Greek Finance Minister is Yanis Varoufakis. If I had my way I would confer sainthood on this guy right now. He is breathtaking in both his deep grasp of the real mechanisms of monetary and fiscal policy (he advocates the same positions as modern monetary theory) but the essential understanding that the core issue is not money, it is people. Varoufakis describes austerity as “fiscal waterboarding.” He repeatedly uses the term of art, “humanitarian crisis,” when he refers to the citizens of Greece. And he is not wrong. In keeping with Tsipras’ lead, of the EZ Varoufakis has said:

“If it is in my power to determine…Greece will neither want to leave the euro nor threaten to do so. We should not have entered the euro–that is crystal clear, but once in, it is disastrous to remove one’s-self from the Eurozone voluntarily.”

Because Varoufakis is so central to all that is happening right now I will add a bit more detail about him so that you can get a clear picture of who he is. First of all, immediately following the Greek elections, he started a whirlwind of meetings in EZ capitals with his counterparts. He never wears a suit or even a tie even when speaking at the House of Lords. It caused a flurry of glee in the British press when he showed up to meet with British Chancellor of the Exchequer, George Osborne wearing black jeans, an untucked shirt open at the collar and a leather jacket. The Guardian happily pronounced his attire “something Putin might wear on a bear hunt.” The Guardian further speculated that a suit would have conveyed “get comfortable I want to join the club” and that Varoufakis does NOT want to join. The Guardian surmised that Varoufakis wants them terrified and that this is the Greek way of signaling, “You can’t get blood from a f$&^ing stone so get real.” (This latter is my interpretation of their thought.) Varoufakis later said, in an interview with Stern, that he isn’t comfortable in suits or ties, he has never worn them and he isn’t about to start now.

Varofaukis is an economist (specializing in game theory) but he has been careful to say, in an oped piece he wrote that ran in the New York Timeson 16 February,

“If anything my game theory background convinced me that it would be pure folly to think of the current deliberations between Greece and our partners as a bargaining game to be won or lost via bluffs and tactical subterfuge.”

[If you want to keep apprised of the Greek crisis, do NOT read the New York Times. Seriously, their economics/business writers remain dedicated to their twin objectives to learn nothing about economics and to share that yawning stupidity with everyone. …You have been warned.]

He has both Greek and Australian citizenship and has taught in Athens and Australia but most recently was teaching at the University of Texas at Austin. All of this change is so recent that his wife is still in the States packing and making the arrangements to move back to Greece with their son. The Varoufakis family moved to Austin following a death treat made, via phone, to Varoufakis wherein the life of his son was threatened. Varoufakis had been involved in unearthing bank fraud and corruption prior to the threat.

Varoufakis runs a popular blog and intends to continue to do so though with shorter posts. He is also extremely active on Twitter (@yanisvaroufakis) and is a great follow.

Another new member of the Greek government is Deputy Minister of Labor and Social Solidarity, Rania Antonopoulos. Until her appointment Ms. Antonopoulos was a senior scholar at the Levy Institute of Bard Collage, one of the true homes of modern monetary theory (this is a different link than the last one). Antonopoulos has also been an advisor to the UN Development Program. One of Antonopoulos’ areas of expertise is job guarantee programs. The program she has designed for Greece over the past two years is the one that SYRIZA will be putting in place under her direction. The Levy Institute has been deeply involved with SRIZA over the past several years and its director, Dimitri Papadimitriou, has been flying to Greece every few months to lend advise.

Still hanging in there?…Perhaps a refreshing sip of carrot juice is called for. I’ll wait.

The core principle of the SYRIZA Plan is to put ordinary Greeks first. They mean to prioritize the 99% over the 1% and they have minced no words on that score. Among the ways they are planning to generate additional taxes is by clamping down on the off-shoring of income by the wealthy. They have a huge database already warmed up and they mean to use it. They are also going to break-up cartels and clamp down on criminal banks. And they aren’t just saying this, they are already preparing the first steps.

On 4 February Varoufakis officially announced that Greece is bankrupt. The conservatives of the EZ gasped and were SHOCKED, shocked I say! As Matt O’Brien, of The Washington Post, wrote on 18 February,

“The problem is the one thing Greece won’t compromise on is the one thing Europe won’t admit: that the bailout has failed, and needs to be scrapped.”

“There won’t be a meeting (on Friday) where we have to listen to how the world is working.”

In other words, while clamping his hands over his ears and loudly saying “lalalalalalala” he really means,

“There won’t be a meeting on Friday where we have to listen to reality and facts.”

I feel better already.

Many have seen the SYRIZA plan to refuse to accept further bailout loans as a sign that they will not only declare bankruptcy, as indeed they already have, but that they follow-up by defaulting and will exit the euro immediately. This is a misreading of their clearly and repeatedly stated intentions. Tsipras has said, to Bloomberg News among many others,

“Greece will repay its debts to the European Central Bank and the International Monetary Fund and reach a deal ‘soon’ with the euro-area nations that funded most of the country’s financial rescue.”

And,

“…it means that we need time to breathe and create our own medium-term recovery program…”

They remain strongly committed to their ECB and IMF loan obligations though, in carefully worded statements, Tsipras seems to be speaking less to the loans made by other nations and while this infuriates the creditor banks, when in bankruptcy having clear priorities is always wise. From the beginning SYRIZA has been fully transparent regarding its actions and intentions so stating their priorities out loud is an expression of their commitment to deal honestly. As far as debt goes, the breakout is as follows: €142n is owed to the EZ/IMF fund (these are speciality instruments raised only for the purpose of resolving various crisis), €53n to individual countries, €20n to the ECB in Greek government bonds and another €50b is owed by the Greek National Bank to other national central banks through the EZ payments system. If you are interested in knowing how Greece got into this situation in the first place and you guess international corporate terrorists Goldman Sachs you would be a long way to right. I did a podcast on that too and it is here.

Among the most astute commenters on Greece is Frances Coppola writing for Forbes and others. She is also an excellent Twitter follow at @Frances_Coppola. Here she is summing up the Greek position nicely,

“Greece has no intention of leaving the Euro or the EU (But others might force it out.)Greece has no intention of defaulting on its debts to primary official creditors. (But others might force it to.)

Greece is committed to pursuing policies that promote economic stability and recovery of Europe. (But others might not be.)”

While many/all believe that it is impossible for Greece to service their crushing debt load, there are some considerations that most fail to notice. (Again, hat tip to Frances Coppola for this analysis.) Greek debt already sits well below market rates and has a very long horizon for repayment. In fact, no principle payments are required on the European Financial Stability Facility bonds (EFSF bonds), mentioned above as speciality instruments, until 2022. Debt service for these primary creditors is 2.6% of GDP, so not entirely unaffordable. The current debt load is, however, 175% of GDP and some EZ idiot (achtung! pardon my sneeze) insisted that the 2012 agreement between the EU and Greece require that Greece reduce its debt load to 120% of GDP in three years! This already impossible task is made even moreso because as the Greek economy shrinks (it’s down 25%, remember) the debt to GDP load naturally floats up.

The real problem for Greece is not debt service but what is being called the “current program,” (aka “structural reforms”) the conditions Greece is required to fulfill in addition to repaying its debt. This is the tool the Troika used to impose “fiscal waterboarding”, to steal Varoufakis’ descriptor, on Greece. The “current program” includes the % of GDP requirement noted above and, even more damaging, the random edict that Greece must run a primary surplus (meaning not including interest payments) of 3% this year and 4.5% in 2016. I’ll say it again, that is the equivalent of a $720B surplus in the United States and it is insanity. In fact, it’s worse than that, it is built-in failure and everyone knows it. The 2012 agreement, to which the Germans are attached as firmly as a crustacean to a boat hull, was never intended to work. Oh, and the so-called Troika monitors, that the IMF and ECB are foisting upon the Greeks because the Troika are determined to treat Greece as a junior, less-than, not-quite-partner.

Which brings me to the Troika. The Troika’s position is that Greece is not in bankruptcy rather it is in a “temporary liquidity shortfall” and lending more money will allow it to meet debt service obligations while “structural reforms” will lead to renewed growth.In reality Greece is in a debt deflationary spiral (a condition when income is falling and debt is rising.) William Black, in an excellent post at New Economic Perspectives, notes,

“The troika overwhelmingly provides loans to Greece. The troika rages repeatedly about what it claims is Greece’s excessive debt. The troika is shocked that extending more debt (rather than aid) to a nation it claims is in disaster because of its excessive debt levels has not transformed Greece into a neoclassical paradise. The troika loans roll over existing Greek debt or bail out banks (and their owners and creditors). Many of those banks, owners, and creditors are foreign. The troika will make money on its loans to Greece unless the terms of those loans are renegotiated or Greece defaults on the loans. The horrific price to Greece of the troika’s loans is brutal austerity.”

Mario Draghi, President of the ECB, adds this useful tip,

“But for growth to pick up, you need investment. For investment, you need confidence. And for confidence, you need structural reforms.”

…and unicorns.

For confidence you need LOTS of unicorns.

In my book, I refer to this as the “Wussing, Wussie, Wusses – Business Confidence” problem. Folks, write this down on the inside of your eyelids; business never leads. Business follows. Business NEVER hires a single employee it does not desperately need at that very moment. Period. RABBITS have figured this out. You plant a carrot seed and when it sprouts we eat the top off. You plant another seed and we eat another sprout. It’s not a carrot until it’s a carrot, people.

And just in case my word isn’t enough, in Davos the infamous New York Times tracked down the even more infamous Kenneth Rogoff who said,

“Much bigger steps need to be taken to fiscally stimulate the hardest hit European countries,” Mr. Rogoff added. “Primarily,” he said, “steps should be taken to significantly lighten the government debt of these countries, with a view to giving space and freedom for governments to spend more.”

HOLY CRAP! Even Kenneth (I can’t manage an Excel spreadsheet) Rogoff gets it. How much more simple can it possibly be?!?!

And now on to Germany… (This would be a good time to take a drink. I’m recommending the Rombauer Chardonnay but that’s just me.)

Given its action in the EU, the German point of view is neocolonialist, at best, a new Reich, at worst. The current German surplus far exceeds even the upper limit for surplus as recommended by the ECB and this is important….

Because there is ALWAYS BALANCE German surplus = debt for others. Period. It’s accounting and we all know you don’t screw with the Math Gods.

German banks are up to their eyeballs in bubbles of the worst kind, right now, this very minute, all over Europe but particularly in Greece and Spain. If you remember nothing else in this endlessly long diary (and I have already said it once) remember this:

Greek loans are all about bailing out Germany.

Only 12% of the 2012 bailout monies went to Greek operations and the Greek people, the other 89% went to cover loans. In a classic example of NYT stupid they assert,

“While Greece sees itself as being punished by creditor’s demands, Germany and a host of European officials have argued that Greece and other troubled nations in the eurozone must clean up the high debts and deficits at the root of Europe’s crisis. They say Athens has failed to make enough progress on structural reforms seen as necessary to stabilize the economy, and they are pressing Greece to raise billions of euros through more budgetary cutbacks and taxes.”

Meaning TINA (there is no option to austerity). Back in the real world, austerity is the proven cause of the continuing Greek decline – not debt, not deficits. In fact, the deficits are too small. A significant fiscal stimulus is essential for Greece to move forward. SYRIZA understands this.

Meanwhile, from their lair under a volcano, top German politicians are demanding that Greece sell islands in order to bail out German creditors. Bwhahahaha.

“The history of Europe is long and blood-spattered. It is nothing like the United States, which is a young country with a common language, clear boundaries and a single political structure. Yes, the USA fought a civil war to achieve its current degree of political unity, and there are no doubt still stresses and strains. But Europe–if you must regard it as one entity, which is problematic in itself–has fought HUNDREDS of civil wars. We do not have a single language, we still cannot agree on where our boundaries should fall and national interest always trump “European” politics. You can’t overturn tribal and cultural identities that go back thousands of years at the stroke of a few politicians’ pens.”

“The Euro is the biggest threat to peace in Western Europe that I have seen in my lifetime.”

And Now…”As the EuroTurns”…

Monday, 2 February: Varoufakis begins his meetings with EU finance Ministers and makes news by wearing a leather jacket to meet UK chancellor of the Exchequer, George Osborne

Thursday, 5 February: Storm clouds began to rage in the EZ when SYRIZA kicked out the Troika monitors who had been deployed to watch over the shoulders of the Greek government dispensing discipline and austerity at will. SYRIZA had promised, during the election, to throw the monitors out and they did so. The ECB, in a tantrum rage and without required consultation, immediately “lifted the waiver” under which Greek government bonds had been allowed to trade. Prior to this the ECB had agreed to accept Greek government bonds even though Greece did not meet the ECB minimum requirements. A formal waiver was in place to allow the transactions and it was this waiver that was pulled by the ECB in a fit of pique.

Friday, 6 February: the ECB clarifies that Emergency Liquidity Assistance (ELA) funding will still be available to the Greeks but, of course, the strings on that money are many and short.

Saturday to Tuesday, 7 February to 10 February: more meetings, more speculation

Wednesday, 11 February: the first (emergency) meeting between the EZ Finance Ministers is held, in Brussels, and they get…nowhere

Thursday, 12 February: The ECB raises the Greek ELA allowance; Tsipras makes his debut in a meeting, also in Brussels, between EU Prime Ministers, and they get…nowhere

Saturday, 14 February: Varoufakis says that he believes Athens will reach agreement with the EU “even at the last minute.” and that many issues are agreed but privatizations & labor (meaning the SYRIZA promised minimum wage increase & pension repayments) remain the sticking points. Also, it is confirmed that exiting from the EZ does mean exiting from the EU and that the EU determines the “arrangements for a member state’s withdrawal.”

Sunday, 15 February: EC President Jean-Claude Juncker (of Luxembourg) announces that he has taken a “personal stake” in the negotiations and is making a “last-ditch” effort to resolve the differences. Tsipras and Varoufakis seem confident that they will come to agreement with EU finance ministers based upon the draft communique they have been given by European Commission’s Pierre Moscovici, called, cleverly, “the Moscovici Draft”. The Moscovici Draft contains no commitment to the “current program”, and instead refers to a “new arrangement”. The Greeks say they are “happy” to sign this “splendid” draft immediately. Moscovici calls upon EU finance ministers to be “logical and not ideological”. Ummm…fat chance.

Monday, 16 February: Fifteen minutes before the start of the meeting with the EU finance ministers, Varoufakis is handed a revised communique by Jeroen Dijsselbloem (the Dutch Finance Minister) and the language from the Moscovici Draft has disappeared and been replaced by the “current program” language which the Greeks remain unwilling to accept. All reference to “new arrangement” has been removed. The talks break down early in the day as Greeks are furious over the bait-and-switch. In the evening a third draft, the “second Moscovici communique” is released which combines elements of both previous drafts but retains the “current program” language. Both the second and third drafts essentially say,

“Give up your silly ideas of recovery so we can continue to pretend that everything is fine.”

Because things are not already screwed up enough, the third draft is translated, by the Eurogroup, to include “in line with” language but Greeks have been given a translation that means “along with”. Obviously, these are two completely different meanings.

Meanwhile, the following Very Serious People make the following statements:

Itallian Finance Minister Pier Carlo Padoan,

“ Greece leaving the EU is out of the question. I’m not worried. I am convinced that we will ultimately reach a common ground and a common decision.”

Here’s the part he didn’t say but everyone heard,

…because otherwise the Germans will be right back here again with my country after our elections.

Dijsselbloem equivocates,

“Within the program there is room to discuss.”

I call bulls*%!

Varoufakis leans in,

“In the history of the European Union nothing good has ever come out of ultimatum.”

Tsipras softens the line,

“We are ready and willing to do whatever it takes to reach an honorable agreement over the next two days.”

Tuesday, 17 February: Because Germans complained that they hadn’t, the Greeks release their own draft IN GREEK and it is mis-translated by the Financial Times. Chaos ensues. The Greeks also release all the documentation from the Monday meeting proving that the German claim that they had made no credible offer had been “economical with the truth.”

Greeks reiterate that they are willing to accept 70% of the “current program” requirements while a “bridge program loan extension” is put in place for a maximum of 6 months during which time a new agreement can be hammered out. As per the “current program” Greece is willing to: reduce bureaucracy (part of addressing EU corruption concerns), strengthen independence of tax administration, create a new efficient and fair system of tax litigation, modernize bankruptcy laws, reform the judicial system (another corruption issue), and dissolve cartels. BUT they make no offer to complete the other 30% of the current program – and that is one of Varoufakis’ “red lines.” In his oped in the NYT the previous day, Varoufakis had said,

“Faithful to the principle that I have no right to bluff, my answer is: the lines that we have presented as red will not be crossed. Otherwise they would not be truly red but merely a bluff.”

More from Very Serious People:

Austrian Chancellor Werner Faymann warns that ,

“Some policy makers have underestimated the risk of Greece leaving the currency union. It would have unforeseen consequences.”

British Chancellor of Exchequer, George Osborne, weighs in with,

“The consequence of not having an agreement would be very severe for economic and financial stability.”

Wednesday, 18 February: Per the recommendations of Tsipras, the Greek Parliament elects pro-European conservative, Prokopis Pavlopoulos to be the (largely ceremonial) President. This is a cross-party hat-tip and further unites the Greek people.

Greece announces plans to ask the EZ for a six-month bridge extension but not under the full “current program.” Greeks plan to propose a new bridging program to keep things going for six months and to pay €7bn in maturing bonds.

German Finance Minister Wolfgang Schäeuble proves he knows nothing about real world economics by saying,

“Greece would like to receive credit, but not fulfill the conditions to allow Greece to recover economically.”

He means austerity and he is…so…very…wrong.

Germans are publicly pressuring the ECB to deny further ELA funding to Greece believing the hard line will signal other anti-austerity movements that they had best not try it. Still, it is doubtful that ECB will cut-off ELA because it signals that ECB is not backing national banks and in such a sensitive environment this might cause other national banks to experience large cash outflows.

Ashoka Mody, former IMF official who helped design Ireland’s bailout, draws notice when she says,

“The ECB’s threats are completely empty. Despite all the bluster, it has no choice. The ECB has to ask itself how it can stabilize the financial system, not undermine it.”

Tsipras tells his Parliament,

“We will not succumb to psychological blackmail. We are not in a hurry and we will not compromise.”

And a new poll backs him up: 79% of Greeks support the government and 74% believe their strategy will succeed in the end.

Thursday, 19 February: Greece formally requests a six-month extension and, as a short-term compromise, they commit to maintain fiscal balance during renegotiation period, take immediate measures on tax evasion and corruption, agree to meet all financial obligations in the interim and to refrain from unilateral action that would undermine fiscal targets. In a HUGE concession, they agree, during the extension,to be monitored by the Troika again. They do not agree to a 3% budget surplus. They also stand firm on addressing their humanitarian crisis and their plan to kick-start growth with stimulus.

Germans reject the Greek proposal out of hand.

Economist Yves Smith has pointed out that while pundits predict that the Germans will “pull up at the brink” That’s what pundits said 101 years ago…right before World War I. That gives me paws…opps!, I mean pause. (I already have paws. Silly rabbit.)

BUT German Economy Minister, Sigmar Gabriel, comes out with the statement that, “we can’t shut the door on Greece.”

Truly interesting is the the comment made by Varoufakis in an interview with Stern (this whole interview is a spectacular read),

“Angela Merkel is by far the most astute politician in Europe. There is no doubt about it. And Wolfgang Schäuble, her Finance Minister, is perhaps the only European politician with intellectual substance. He’s a genuinely committed European and a deep down federalist.”

Proving that he is genuine when he speaks of valuing the dialectic. (This is a long read but incredibly thought provoking.)

Friday, 20 February – Today: EU Finance Ministers to meet and decide to offer Greece a four month extension in which to negotiate but they slap down all Greek demands and insist that Greece color inside the lines of the “current program.”

German Finance Minister, evil #$%hole that he is (“intellectual” or not), is caught smirking while saying,

“Being in government is a date with reality, and reality is often not as nice as a dream.”

(Don’t worry, there’s an extra hot corner of hell waiting for this guy.) In the meantime, it is worth knowing that the current Board mix of the ECB is very anti-Greek but the Board rotates and the composition of the March Board is much more likely to be easier for the Greeks to work with. …and now they have four months to catch their breath, make a plan and get it done.

And before I head back down the rabbit hole for the night, a couple more quotes that are helping to keep me from screaming at my laptop about all of this:

It is impossible for me to begin to write anything about the events of 9-11 without first bowing my head and taking a moment of silence in remembrance of all those who died and the grief which still lives on in the soul of our nation. Since I will be writing here about the genuinely heroic acts it took to save the economy on that day, I should mention that 74% of all civilian casualties were from the financial community. This represented not only wonderful people (I elect to think the best of them all) but of significant expertise in some of the most esoteric areas of our monetary system. In particular the staggering loss of six hundred fifty-eight employees by the largest securities interdealer broker, Cantor Fitzgerald, sent shockwaves through the industry that were and are still being felt.

I didn’t intend to write a piece about 9-11 or to devote my Thursday spot on the Netroots Radio program The After Show to this subject. In fact, I had planned to spend this week on the thrilling topic of the discount window. It was plain old curiosity that took me to the internet to find out what the Federal Reserve did on 9-11. As it turns out, it was not an easy story to unravel and between late Sunday night when I first started reading and Tuesday night when I started writing I read several hundred pages of reports as well as the tiny amount of media reporting available. Here’s the thing I didn’t know and I’ll bet you a wheelbarrow of carrots you didn’t either, on 9-11 and the days which immediately followed, a relatively small number of people did some genuinely, physically heroic things in order to keep the economy from going off the rails and none of them were named Alan Greenspan.

In order to piece this story together I read all of the 2001 Annual Reports of all twelve of the Federal Reserve Banks, congressional testimony and speeches by members of the Board of Governors, white papers by economists yawn, and a handful of accounts in the media. If you have the time grab some kale chips and kick back with the 2001 Annual Report for the Federal Reserve Bank of Chicago, it reads like a thriller and includes photographs of some of the Chicago team who made all the difference during those days of chaos and fear. The Government and Finance Division of the Congressional Research Service of the Library of Congress also produced a truly fine report prepared by Gail Makinen, The Economic Effects of 9-11: A Retrospective Assessment.

Keep hopping for a story which is both astonishing and moving. I promise. It’s also really long but you won’t regret reading through to the end. I promise that too.

On the morning of 11 September 2001, when Federal Reserve Vice Chairman Roger W. Ferguson, Jr. arrived at work in his office in the Federal Reserve Bank in Washington, DC, he was alone. I don’t mean there weren’t other people in the building it’s just that it was a busy day and all the other members of the Fed Board of Governors who are normally in Washington were traveling. In fact, Ferguson was the only member of the Board who was anywhere near the District. Alan Greenspan, the Chairman of the Fed, along with William J. McDonough, President of the Federal Reserve Bank of New York (which is, in case you didn’t know, the first among equals in the Fed system) were both in Zurich, Switzerland at a meeting of central bankers. Actually, it was worse than that, Greenspan was on a commercial plane in route back to the US and was out of contact with his staff. (Remember, this was before wifi was available on flights.)

Ferguson, considered a deliberative and thoughtful man by his staff, settled into his office and turned on his television to keep track of the markets. When the second plane hit the World Trade Center no one had to tell Ferguson, he knew the country was under attack and he already knew that the attack was aimed at the financial backbone of the world, lower Manhattan. Ferguson declared an emergency and all over the Fed stunned staff found assurance in going through emergency procedures for which they had prepared. The Joint Y2K Committee Ferguson had so recently headed proved to be a windfall of emergency planning and the entire Fed system referred back to those decisions and the associated training throughout the 9-11 crisis. By the time employees could all hear the muffled thump coming from the direction of the Pentagon and smoke could be seen out the windows the staff had secured themselves and the premises and they had started to organize their war room.The President, George W. Bush, was still reading a children’s book.

Even as all of Washington dithered between evacuating or sheltering-in-place fearing the rumored fourth plane, Ferguson was already worrying about the next disaster, the crash of the entire US financial system. Within forty-one minutes of the second plane hitting the World Trade Center Ferguson issued as simple clear statement, via Fedwire, to all member banks and institutions assuring them that the federal fund transfer system was “fully operational” and that Federal Reserve Banks would “stay open until an orderly closing could be achieved.” In other words, we are here and we are fully functional. And that was just the first 41 minutes. Alan Greenspan was still on a plane with no knowledge of events and the President was just getting to Air Force One.

Greenspan’s plane was one of the lucky ones. Instead of being grounded in Iceland, Greenland or Newfoundland as had so many other international flights, Greenspan’s flight was able to return to Zurich. He had no idea why until the plane landed some time later.

Meanwhile, things at the Federal Reserve Bank of New York weren’t just chaotic, they were terrifying. Even before the first tower fell Protection staff had locked the vaults, secured the facility and cleared the street in front of the Fed for emergency vehicles. Key personnel equipped with special frequency radios were in touch with the FedNY back-up location in New Jersey letting staff know that there was an emergent situation and to prepare for accepting the operational responsibility of the Bank. Down in the lobby Protection staff began to pull in injured pedestrians so that they could be treated by on-site Fed medical personnel and as the towers fell this trickle of pedestrian refugees became a flood. Someone on the physical plant team thought to turn off the ventilation systems immediately in order to preserve the air quality inside the building and Fed staff handed out face masks and wet paper towels to ash-covered survivors. Housekeeping staff divided their efforts between cleaning up as much of the ash as possible near the entry points where it was worst and cleaning the cafeteria. Incredibly, by noon the cafeteria was up and running and was providing beverages and snacks to the refugees, until they were able to evacuate, and then meals to staff and emergency responders. The Fed continued to feed fire and police personnel around the clock. The FedNY also provided space for first responder trauma counseling, a service much needed and much used during those early days.

Back in Washington, DC the capitol area was under an evacuation order. Most FedDC staff left but about one hundred remained to help Ferguson run the Bank. By now employees knew that at least one other plane had been bound for Washington but still they remained. Ferguson had reached out and spoken with members of the Board and the Federal Open Markets Committee (FOMC) and by noon the Fed publicly released a statement which proved to be both elegant and powerful in effect,

The Federal Reserve System is open and operating. The discount window is available to meet liquidity needs.

I know, it doesn’t sound like much but if you are JP Morgan Chase Bank and you have not only had to evacuate your primary clearing facility but may well have entirely lost it, this statement translates to, “We are in this with you. Let us know what you need and we will back up the dump trucks of money.” Bankers everywhere took a tiny breath and thought, probably for the first time that day, their bank might live to see the close of business. You see, only a handful of banks were directly effected but among them were the Bank of New York (BoNY) and Chase so the resulting earthquake would shake almost all banks due to the interrelated structure of the industry. Chase and BoNY, among many other critical functions, hold the clearing accounts for one hundred percent of the primary dealers and interdealers for the securities market. It was fortunate that Chase was already in the process of moving its clearing operations to Florida. While it appears they have never heard of global climate change they were able to resume operations to an increasing degree as the week went on. The BoNY was harder hit and their ATM network crashed and remained down until the 19th. (BoNY did refund all customers the fees associated with using the ATMs of other banks.)

As far away as the Federal Reserve Bank of Chicago non-essential employees were also evacuating and the back-up location was being warmed up. The Fed in Chicago is one short block from the Sears Tower and while others around the country may not remember, Chicago was very much in fear of attack. Chicago staff decided not to shift to the back-up because they knew that DC and NY would need them and they felt the time it would take to move was not time the system could afford. Gordon Werkema, a Vice President at the Chicago Fed said, “Closing the Fed would be like shutting down the fire department because there are too many fires.” From their offices in Washington the Department of the Treasury Office of the Comptroller of the Currency (OCC) had issued a statement saying that banks around the nation could close early at their discretion. Several in the neighborhood of the Sears Tower took them up on it.* In the war room of the Chicago Fed one employee wrote, “JUST THE FACTS” up on the white board at the front of the room. It was going to be that kind of day.

[*Bank of America and Wachovia, both located in tall towers in Charlotte, NC, also elected to close for the day and, wisely, erred on the side of employee safety.]

When Seven World Trade Center fell steel I-beams scissored into a major Verizon communications hub. Switching equipment which handled 40% of the land lines in lower Manhattan and 20% of the lines for the New York Stock Exchange (NYSE) were instantly cut. This included all their internet, voice, PBX and data lines. Other providers were also hit though none quite as deeply. That the FedNY was still up and running was a tribute to their (clearly smarter-than-your average-bear) IT staff who had managed to keep the computers and networks functioning, for the most part, with intended emergency systems working as planned. During the Ferguson-led Y2K emergency planning it was determined that key employees should carry two cell phones from two different providers and pre-load them with a master list of phone numbers including their key co-workers, key bank customers, banking regulators, utility service providers and the like. In many cases they had multiple numbers for specific contacts at each organization. It was this kind of planning which proved invaluable at all the Fed Banks across the country. That essential people were able to reach one another was a significant cog in the process. For those that the Fed, in particular the NYFed, were unable to locate, industry organizations stepped in and tracked down their people linking them back to the Fed and freeing Fed employees to put out other (metaphorical) fires.

Elsewhere in lower Manhattan virtually every bank and financial institution was forced to evacuate. This included the New York Stock Exchange, the Nasdaq, which was closed for the very first time, and the New York Mercantile Exchange. The American Stock Exchange, known as “the curb”, had been located in the Towers and the New York Board of Trade had been in Four World Trade Center. Both were now without a home but still had their people. In the surrounding area 18,000 small businesses were disrupted, damaged or entirely destroyed. Outside of the US, other exchanges, including London, closed out of an abundance of caution. The money markets and foreign exchange markets were seriously disrupted but did manage to stay open throughout the day.

In Chicago the Fed had their back-up ready, just in case, by 10:30 AM. They remained in constant touch with Fed officers around the country including Jack Wixted, Chicago’s Vice President of Supervision and Regulation (S&R), who had been in Washington, DC for a meeting and was now assisting Ferguson, Chicago’s Senior Vice President and CFO, Carl Vander Wilt, who happened to be at the NYFed for a meeting and stayed to assist through the long day there and two of Chicago’s S&R staffers who were in San Francisco at the Fed where they managed to get a rental car to drive the long way home. All the Fed branches were able to communicate with one another throughout the entire crisis.

Back in Washington Ferguson was only just getting started. Alan Greenspan, finally on the ground and with a phone in his hand, had called Ferguson and told him that he “trusted him” and that he knew Ferguson would make the right decisions. Ferguson immediately got out every tool in the Fed’s great big tool box and brought them all to bear opening up the taps of liquidity.

First up was the discount window. The Federal Reserve Act of 1914 was intended to bring stability and flexibility the financial system through the creation of the Federal Reserve Bank and sets as one of its objectives the necessity to “furnish elastic currency.” Certainly this was well in evidence during the week that followed 9-11. Each Fed Bank was instructed to reach out to all their depository customers to find out if and how much they would need to borrow from the discount window on the night of the 11th. Fed Banks across the country had staff working until midnight to help banks make assessments and close their day. Interestingly, during Y2K planning the Fed had arranged with depository institutions to set aside some pre-pledged collateral and it was against these emergency funds that most banks drew thus saving the time and the regulatory checking usually necessary. [If you want to learn more about the discount window that will be the subject of my segment of The After Show next week on Thursday morning. If I’m lucky I’ll get time to write a diary as well.] As a point of reference, in the year preceding 9-11 the discount window averaged $200 million dollars in lending a night. On 9-11 that jerked up to $37 billion, then to $46 billion on the 12th. The thing that made this level of lending acceptable was that the need for the lending was driven not by insolvency but rather by true liquidity and this was the very sort of problem for which the Fed’s “elastic currency” capability was intended.

Ferguson had also directed and communicated that Fedwire would remain open until 10:45PM ET but even the significant extension of time did not change the fact that many banks were not yet in a condition to communicate. The illiquidity of banks became evident when, by the close of the Fedwire day, transfers were down by more than 40%. The NYFed New Jersey back-up site had taken over NYFed Fedwire operations on 9-11, leaving the remaining core team to deal with larger issues including the fact that commercial paper (short-term loans) due to roll-over on the 11th or 12th were unable to do so. An example of why this was problematic was seen up at the Chicago Fed where a large customer and employer was due to roll-over one of these loans and use the profit for payroll. With the markets closed and access to normal liquidity choked off, the Chicago Fed, who had staff in direct touch with this company, made a loan not to a bank but directly to the corporation involved. Repayment was made immediately after markets reopened.

In New York, once it was deemed relatively safe, all non-essential FedNY staff left but a core continued on despite extraordinary conditions and worked only three blocks away from what was now Ground Zero. They worked until nearly midnight making discount window loans to customers who, themselves, were staggering into their back-up facilities, shaking off the ash and trying to save their banks.This FedNY core team stayed through to Wednesday afternoon when the fire department finally required them to evacuate due to fears that the One Liberty building would collapse on the them.

As the core employees left the NYFed all around them they could see not only the dangers and tragedy of the day but the obvious logistical issues which would have to be resolved before they or any of the rest of the financial industry would be able to return to their primary facilities. Thousands of phone lines were cut, including the Verizon lines described above. Debris damaged or destroyed not just the area right around Ground Zero but the ash had floated into electronics and buildings air systems making them non-functional. Fires and water also left their mark. Transportation and power joined telecommunications in being seriously compromised. Even more directly applicable to the financial industry was the fact that while most companies had back-up sites they had never tested all those sites working together. Beginning as early as 9-11 itself, the IT team at the NYFed started working with customers to get them back into communication with the industry. IT staff worked around the clock throughout the week and all through the extensive weekend testing for the NYSE and the Nasdaq in order to ensure that trading could resume on Monday, the 17th. They were assisted in this by employees of Verizon, Con Edison and FEMA.FEMA, the State of New York and the City of New York also prioritized sending structural inspectors out to verify the integrity of any buildings which were in question.

The staff at Chicago Fed, like all the branches across the country, was working twelve to sixteen hour days and many worked those hours straight through the weekend. Different Fed branches have different areas of expertise. Chicago Fed, due to its proximity to the Chicago Board of Trade and the Chicago Mercantile Exchange, was given the responsibility for collecting data and coordinating with the futures markets. Chicago also has the Customer Relations & Support Office (CRSO) for the entire Fed system. Every Fed depositor has a “personal” Fed CRSO banker and each person in customer support has access to multiple ways to reach their prime designated contact at all of the fifty largest banks in the country. This allowed Fed customers to deal directly with people they already knew and who already knew them. When it came to calming fears and providing liquidity options, this person-to-person approach proved to be invaluable. CRSO also kept their webmaster busy adding constant updates to their website so that all Fed customers would have access to the most current information immediately. Like so much of the Chicago Fed, CRSO employees stayed each night until 11PM in order to assist their customers with daily closing. Even more determined than that were the Chicago loan officers who kept the discount window open until midnight and then came back and did it all again for the next three days.

On top of everything else, Chicago had banks who needed to be resupplied with cash and though the Fed had plenty on hand they could not get armored truck carriers to come into downtown Chicago due to fears, fanned by the media, associated with the Sears Tower. With banks beginning to run low and one bank needing as much as $1.2M right away, Chicago Fed employees found “alternate methods” of getting the currency delivered within two hours.

Ferguson and his team in Washington remained in close contact with Fed branches around the country and were only too aware that another tsunami of a problem was beginning to break. The Federal Reserve had, at that time, a fleet of aircraft that moved 46,000 pounds of checks around the country each day to be processed at the various clearing centers. The fleet also delivered new currency from the Bureau of Engraving and Printing to the Fed branches. Yep. That’s what they did. And all of them were grounded by the FAA. (It seems to me, a mere rabbit, that some sort of conversation might have been appropriate…?) So here’s what used to happen when the Fed planes didn’t fly. Checks that were drawn on banks other than the bank of the person who wrote them got flown around, delivered to the appropriate Fed branch, processed and cleared into the receiving bank. Lots of those checks were tiny but some of them were huge. Therefore, some banks had way too much money in their accounts, from checks written but not cleared out, and others were way too short, from checks not yet cleared in. In the ten months prior to 9-11 there had been a total of $766M in check float. Between 9-11 and the 17th there was $150B in check float. Though used in an unprecedented way, check float is a positive liquidity action and represents just another creative way the Fed found to pump money into the economy when needed. Usually, of course, the Fed charges what amounts to overdraft fees for float since it constitutes an implicit, non-collateralized loan, but Ferguson made sure banks knew that they would not be punished for conditions which were out of their hands. In 2014, of course, the percentage of physical checks being written has dropped dramatically and a very high percentage of transactions are by EFT but 2001 was still all about paper.

The biggest aspect of the check float issue was that by allowing this previously untried tool to leverage the economy, the Fed was able to keep consumer confidence in the banking system in tact and avoid any serious runs on banks. Businesses and individuals alike continued to be able to access their money via the normal methods. The only exceptions to this were that in some locations either banks or ATMs ran short of currency while waiting for the Fed to deliver more. By the weekend of the 15th and 16th banks actually had higher than normal amounts of currency in their vaults because armored trucks had delivered cash (finally!) but consumers decided to stay home for the weekend and didn’t withdraw the normal amount of “weekend” money.

Which brings me to the next problem–paper. The trading between securities dealers, called interdealer trading, begins with repos (repurchase agreements) at 7AM and then the interdealer securities start selling at about 8AM. By 9AM interdealer trading is done. This meant that on 9-11 by the time the towers were attacked the trading day had nearly finished. Located on floors 101 to 105 of One World Trade Center was Cantor Fitzgerald, the single largest interdealer broker, who alone controlled 25% of the volume in securities. On 9-11 $500B in repos and $80B in securities had been traded but the settlement instructions were burned when American Airlines Flight 11 exploded into the tower only two floors below. In most cases, the only side of the trade data that remained was with the company on the other side of the trade. In some cases even that was problematic. As traders everywhere began to worry the Fed instructed regulators to work with dealers to determine the original instructions as best as could be done and for regulators to sign-off accordingly. This work was painstaking and it took many weeks to complete. Fed regulators worked many long, over-time hours to accomplish this task in as timely a manner as possible. In days to come the Fed further provided auditors with special instructions regarding materials/data entirely lost in the disaster.

Perhaps the most staggering story within the general financial community is about Cantor Fitzgerald. Obviously, the tragic deaths of 658 of their 960 New York employees was devastating in many, many ways. Cantor Fitzgerald Chairman, Howard Lutnick, whose brother was among the victims, was however resolved to bring the company back and when trading resumed, on the 17th, with the help of their London office, Cantor was again trading. Lutnick pledged to give twenty-five percent of the profits of the company to the families of the employees for each of the next five years. This resulted in a distribution of $180M with an additional $17M raised by a charity set-up by the Lutnick family. Cantor also paid for the health insurance for the families of these employees for ten years following 9-11. In case you missed it, that was $180M which was NOT distributed to partners in the firm but to families instead.

As the new day, the 12th, dawned the FedNY back-up site was up in New Jersey was running and ready for the tumult of work that was coming. Alan Greenspan had come back to Washington on a special military flight and the FOMC, which he chaired, ordered the Desk to buy every proposition offered for sale at the Federal funds rate. The Desk is the arm of the Fed, located at the NYFed, which handles all the Open Market Operations (OMOs), the buying and selling of US Treasury instruments. Translation of the FOMC directive? Every authorized primary dealer who offered to sell the Fed treasuries was accepted. This is never the case in a normal day and, in fact, on 9-11 prior to the crisis the FOMC had already decided not to either buy or sell anything (called, cleverly, “taking no action”). Because of the attack the Desk was unable to trade on 9-11 regardless. On the 12th by buying back Treasuries the Fed was effectively pouring liquidity out into the economy through a truly huge pipe. Where it is normal for the Fed to view OMOs through the lens of what is best for the Treasury, during a crisis the lens is reversed and the Fed views all OMO transactions based upon being of advantage to the dealers.In the three days following 9-11, the Desk purchased $190B in Treasuries and $8.75B in repos and they stayed open until nearly midnight so that dealers would have time to assess their positions. Additionally, since many dealers did not have the normal communications capabilities in their back-up sites, the Desk worked manual systems (ie telephone, pen and paper) to accommodate all sellers. In a speech given in 2003 at Vanderbuilt University, Ferguson describes the employees on the Desk during that time as having “performed heroically in running the open market operations.”

As in Chicago the previous day, other members of the NYFed team worked to get additional currency delivered to banks in Midtown and elsewhere in the NYFed’s region. ATM withdrawals were up 31%, which was to be expected, and the Fed had plenty of currency available. What it did not have was armored car companies willing to make the pick-ups or deliveries. This problem was resolved when employees from the back-up office coordinated with police from New York and New Jersey to bring $425M in from New Jersey to shore up banks that were low. Between Tuesday, 9-11 and Sunday, the 16th about $5B in currency was distributed around the country by Fed branches which was, all things considered, quite reasonable. Fortunately, credit card processing was unaffected nationwide and while most consumers stayed home and did not spend, increased spending was noted in groceries and gas, the latter presumably because flights were grounded and because in times of uncertainty people like to have a full tank in case they need to evacuate suddenly.

Also running low on currency were several foreign banks and financial institutions with branches in the US. They were requesting dollars from their “home” central banks but the banks didn’t have enough. In order to address this unusual situation, the Fed arranged currency swaps with the Bank of England and with the European Central Bank. The Bank of Canada also requested an increase in the ceiling of their currency swap agreement from $8B to $10B. A currency swap is when a foreign central bank agrees to give us X amount of their currency in trade for Y amount of our currency. In a given amount of time later, perhaps a month, they return our currency to us plus the Federal funds rate and we return their currency to them. Ultimately, between the three central banks, $90B in currency swap agreements were signed creating additional liquidity as needed.

As per the quiet and consistent Fed leadership out of Washington, all branches of the Fed continued to aggressively inject as much liquidity into the financial system as the system requested. Further, the Fed encouraged member banks to work closely with any of their customers directly effected by 9-11 and added that it was recognized that the banks may need to expand their balance sheet and/or extend unusually favorable terms. The Fed provided its S&R teams with directives to work closely with banks and to provide all necessary assistance within the law. This, of course, upends what is (supposed to be) an adversarial relationship and it was widely commented upon (approvingly) by the financial industry at the time.

While all of the Fed monetary tools remained fully engaged between the 11th and the 14th, it was the check float which caused the most concern because it was so far outside the norm. The Federal Reserve Bank of Atlanta, which had just opened their new facility earlier in the year, manages both currency operations for the entire Fed system and also includes the Fed Retail Payments Office which includes FedACH (automatic, electronic check processing). Obviously, the check float tsunami was storming in their direction in a big way. Their solution was to go back to basics. They got out maps of the country (“See, dear, I TOLD you that AAA membership would come in useful.”) and while some employees were creating a hub and spoke system for driving checks around the country, other staffers were contracting with trucking companies. Still other members of the team were coming up with a way to perform “check triage” so that high value checks and those traveling a long distance would move through the system first.

By Friday, when the Fed fleet was once again cleared to fly nearly seventy-five percent of the checks which had backed up had been delivered via ground transportation to the correct Fed branches. The rest arrived throughout the day on Friday and Saturday. Employees at the new check clearing center at Chicago Midway, where most checks from the Midwest processed at that time, describe Friday afternoon as “the dam break(ing).” Bags of checks were piled high and were everywhere. Employees could not see over the piles.

Senior Processor, Andrew Hall, said, “We started to wonder when they were going to stop. Right after you made a dent and could see over a pile of checks more would come.” Chicago alone processed more than six million checks over the weekend. Hall added, “The newer people were helped by the more experienced ones. We pulled together and got it done.”

“We pulled together and got it done,” could have been the theme song for the week throughout the Fed system and no where was that more in evidence than the Fed’s cooperation with the Securities and Exchange Commission and in conjunction with the President’s Working Group, utility companies, FEMA, city and state officials, industry groups and other various stakeholders to get the New York Stock Exchange, the Nasdaq and the New York Mercantile Exchange back up and ready for operations on the 17th. It was considered absolutely essential that the markets open smoothly and it was a given that volume was going to be exceptionally high. Any operational glitch, it was feared, might indicate a systemic weakness and was deemed unacceptable. All parties involved worked through the weekend testing systems and then testing them again trying to be certain that the, in many cases, temporary networks would remain stable. Daily press conferences were held to keep anyone who was interested in the loop. Everyone involved anxiously awaited the opening bell and the expected electronic shock wave of transactions to follow.

The sun rose on Monday morning the 17th and, in Washington, the FOMC had met and prior to the opening of the markets released a statement announcing that the Federal funds rate was being reduced from 3.5% to 3.0%.

The statement went on to say, “The Federal Reserve will continue to supply unusually large volumes of liquidity to financial markets, as needed, until more normal market functioning is restored. As a consequence, the FOMC recognizes that the actual funds rate may be below its target on occasion in these unusual circumstances.”

Because, as modern monetary theory economists have been explaining for some time now, only the Fed can create money/liquidity out of thin air and it does this both during the extraordinary times and the mundane.

By the time the bell rang on Wall Street the markets were off to the races. By the closing bell a record shattering 2B shares had been traded with virtually no malfunctions. The NYSE was joined on its floor by the newly homeless specialist traders of the American Stock Exchange (AMEX) who were welcomed to function as floor brokers. The most impressive accomplishment of the NYSE was that a mere nineteen short days after 9-11 normal trading volumes and patterns had returned. The market had calmed.

It should not go without saying that the futures markets, except those located in New York, did resume normal operations on the 13th. The New York Mercantile Exchange was able to get back into their site and re-open on the 17th and the New York Board of Trade, made homeless by the events of 9-11, relocated to their Queens back-up site and re-opened reasonably smoothly on the 17th as well.

In the days and weeks which immediately followed 9-11 analysts drew together important data and lessons (hopefully) learned which inevitably came out of this shared, national experience. The first and most important is that our monetary system, with its redundancies and unusually diverse brain trust was able to absorb a blow intended to, quite literally, disintegrate it. Great human tragedy was not magnified by a financial meltdown which would have spread another form of tragedy nationwide. The virtue of the Feds great big toolbox and the way in which all the tools interact with one another during a crisis was in evidence daily. Certainly, no other organization within the government was positioned to respond as quickly and to reach as deeply down into the fabric of the emergency as was the Fed. Not to be underplayed was also the value the Fed had come to place on person-to-person relationships. On a day when “trust me” really meant something the Fed was able to draw upon well established positive relationships in order to keep the economy of the United States and of the world moving.

But never, ever, should we forget the cost of that day not only in irreplaceable human lives but in the 430,000 jobs that were lost, $2B in lost wages, the $36B in clean-up cost, $30.3B in lost GDP to the City of New York, the cost for the new World Trade Center which continues to rise well past $20B, the insurance claims of $40B and all of that is before the additional cost of homeland security and, the worst of it all, the trillions of dollars and the precious, precious blood of our soldiers given in two wars.

Still, while our President was posing for photo ops and our Vice President was hiding under a mountain, colleagues of Roger Ferguson speak of him as having been “cool under fire without being overbearing” and they praise him saying he “nailed it” when it truly mattered. Kenneth A. Gunther, President and CEO of the Independent Community Bankers of America, said, “The Federal Reserve’s response on September 11th ensured a fully functioning payments system when the private sector could not…. The Fed’s dual roles [as provider of services and regulator of the payments system] are an essential element of the ongoing homeland security of the United States.”

Personally, I like best what Jerry Jordan, President of the Federal Reserve Bank of Cleveland said to his people on the 11th,

In responding to this crisis, don’t think of yourself just as a representative of our Bank but as central bankers of our nation.

Update:

11 September 2015: If you were at any Federal Reserve branch between 9-11 and 9-17, please contact me via KosMail or on Twitter via@ArlissBunny.

Also, since the original posting last year I have learned that the leadership of Cantor Fitzgerald had to be forced to behave as a moral human. My thanks to those who created the pressure which brought Mr. Lutnick into line.

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This is the second bite-sized installment in my series on why monetary policy matters to progressives, why it’s worth your time to learn and why it isn’t as hard or as boring as you think.*

Having said that I’m going to start this diary by talking about fiscal policy. When I say “fiscal policy” one of three things will come to mind: a) the spending and taxation policy of Congress, b) that thing you vaguely remember from your macroeconomics class fifteen years ago which may or may not have to do with something-or-other or c) a really excellent abs workout. Actually, as I see it, this is a trick question because in practice none of these things are the case.

Fiscal policy is supposed to be the macroeconomic (I’ll explain this term below) effect on the economy of the taxing and spending policies of Congress and technically this is the case. Practically, however, no fuzzy dice. This would be because the word “policy” implies that Congress is making spending and taxation decisions based upon something other than how it effects their individual re-election campaigns and the associated campaign coffers. I’m not talking about the infamous Bridge to Nowhere or, my personal favorite, the Teapot Museum. I’m talking about reducing the funding for Head Start and unemployment benefits in favor of funding a missile system which the Pentagon has specifically said it does not need or want.

In Congress, in accordance with the Constitution, spending bills must originate in the House. This is called “the power of the purse” and by that the current House means the power of the purse to beat you down until they can wipe you off the bottom of their shoe on the nearest patch of grass. This is also called the “Paul Ryan Budget” and the clear objective is to destroy the middle class and the poor while pouring money down the throats of the top 1% until they choke our economy to death.

Congress is supposed to be using the power of the purse to spend money into the economy when it is needed and pull it out, via taxation, when the economy starts to overheat. THAT would be “fiscal policy” and there are two essential things you need to know about it.

1. Congress does not need to tax ANYONE on order to have money to spend. Congress owns this thing called a printing press and can direct the Treasury to put that press to work any time it likes. (I will cover this in much greater detail in a later installment.)

2. Inflation is not a threat when unemployment and underemployment are high and while Republicans and many elected Dems cannot understand this the concept will make perfect sense to you if you take a kale break and think about it. Inflation happens when demand exceeds supply and more can be charged for things that are suddenly in short supply. (Think Cabbage Patch dolls in 1983 or the gold iPhone 5s.) For that to be the case an economy would have to be working at full capacity both in industrial capacity and, more importantly, in labor capacity. Does anyone, anywhere on this planet think there is any way this economy is in danger of inflation? Ok, I’ll grant you, Alan Greenspan and Michelle Bachman, but I’m talking about people who might actually be in touch with reality. Anyone…anyone? Yeah, I thought not.

Congress is supposed to be thinking about the whole vegetable garden when they are making their spending and taxation decisions but they are not so the result is that annual spending, while continuing to have macroeconomic effect, is much more correctly seen as having microeconomic effect in that it is directed at specific individuals (the 1%), specific businesses (big business not Main Street) and specific (conservative) social agendas. If you want to understand the single biggest reason why the economy is still soft, this is it. The House has abrogated their fiscal responsibility completely. Period. Ffft!

It is worth saying that while “austerity” and “fix the debt” sound like macroeconomic policy they are tissue-paper thin lies used to disguise moving the wealth of the economy from the pockets of the many into the greedy hands of a few. Again, later in this series I will describe this process and how we can put an end to it so stick with me, baby. It’s going to be fun and besides, we rabbit Americans really know how to party.

Macroeconomics and microeconomics may be courses you took in college or they may be courses you avoided like the plague. Certainly, college is not necessary in order to understand the most important basics. For now, all you need to know is that macroeconomics is the big stuff: unemployment, inflation and the currency exchange rate. Functionally, monetary policy is the purview of the Federal Reserve Bank of the United States of America (the Fed.) Everyone except elected officials will immediately note that unemployment can be much more easily and directly improved by Congressional spending (fiscal policy) but, as we all know, John Bohener is much too busy regulating his level of orange to pay attention to the decimation of the middle class.

Microeconomics is, as you will have guessed, the little stuff: individuals, specific businesses or industry sectors, specific social classes. Microeconomics is how all the big stuff, macroeconomics, thumps down hard on your kitchen table and mine. Microeconomics is personal and it’s the part that hurts but never, ever, EVER let yourself be mislead. Microeconomics flows from macroeconomics. The big stuff drives the little stuff. If Congress is only spending into the economic sectors that are the exclusive territory of the 1% and if the Fed is only spending in a manner which serves to sequester money out of the economy AND is refusing to regulate banks and investment institutions then things can only get worse. Which explains a lot.

But this doesn’t have to be the case. Progressives have formed coalitions and created memes that have moved mountains before. We must and can do it again. The first step is understanding the vocabulary and the mission. Then we do what we are best at, we raise some H-E-double-carrots. We won’t get everything we want but it is entirely within our power to get a lot more than we have now. Tune in to Netroots RadioThe After Show every Thursday at 11AM EDT/8AMPDT for more. If you can’t join us for the live stream then catch the podcast available on Stitcher Radio and iTunes.

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For progressives it is no new story that astonishingly malnourished messaging by the Obama administration compounded by egregiously misrepresentative coverage by the mainstream media has allowed an unending flow of air to feed the anti-ACA (Obamacare) gluttons. Personal, anecdotal stories, many against and a few supporting the ACA have been around for months. What has been lacking are the “it worked for my small business” stories so I thought I would throw this onto the table for general consumption.

I own a small manufacturing business and we have always provided health insurance to our employees. This has come at great expense to our firm as the cost of our policy increased by double-digit percentages every year. In recent years, much to our shame, we could no longer survive the full cost of the insurance so we had to pass twenty percent on to all participating employees. That percentage was, in turn, enough to cause several employees to have to drop coverage entirely. We were horrified and crushed but no amount of shopping around seemed to get us close enough to be able to overcome the huge mountain of cost. Ultimately, we ended up covering seven employees for a cost of, brace yourselves, $6570.58 per month!!! Please forgive me my scoff when I hear people complain about the high cost of their coverage under the ACA. Quality insurance has, for many years, cost an obscene amount and anyone who doesn’t know that wasn’t really paying attention to all the details.

So, what have we done under the ACA?

Well, we dropped our former policy, the group coverage, for our employees…and they are thrilled.

Our former policy was equivalent to a silver plan plan under the ACA Marketplace so we asked each of our employees to go on-line into the Marketplace and find the cost of their individual silver plan options. We asked them to print out that section (which contains no actual, private, information). We calculated the median cost of a silver level plan for that person. Each employee now receives, on their paycheck, a line item called “Recommended Health Insurance Bonus” which constitutes one hundred percent of the median silver plan cost, as described above, plus the extra needed to allow for the tax hit so that each employee truly nets out the necessary amount for the insurance.

Every employee can now elect, of their own free will, to purchase insurance (or not) and at what “metal level”, utilizing the new bonus in the manner they feel is best suited for them.

Several things are notable about this.

1. We are now able to provide for 100% of the cost of insurance as opposed to eighty percent.

2. Because of where we are located, almost all the local providers of medical services are participating in plans offered through the ACA Marketplace so none of our employees experienced having to change doctors. (We were sure to check this prior to making the shift.)

3. The employees who were participating in the old policy and paying the 20% cost, no longer pay that deduction so they all received a net take-home raise (which several used to purchase gold level plans which are STILL much less expensive than what they were paying previously.)

AND NOW FOR THE BIG FINISH…

Before the ACA we were covering seven employees at a cost of $6570.58 per month. Now we are providing for the coverage of eleven employees at a cost of $1863.76 per month. This is a savings of $56,481.84 per year!!!

…which we are using to hire a new employee and purchase some, much needed, new tooling.

The ACA is a boon for small business and we, for one, are using it to grow. There’s the small business messaging that is missing from, well, everywhere. Spread the word.

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It’s your fault, DailyKos. It started here. I was just reading blog posts and minding my own business. I was normal*. Then I saw the “Live at 9AM” daily blog and I got curious. I downloaded the Stitcher app and started to listen to David Waldman (“KagroX” here in the Kosverse) every day. The next thing I knew I had done a search on Stitcher and was listening to Kagro in the Morning, The Majority Report with Sam Seder and The David Pakman Show five days a week. Shows available bi-weekly and weekly were added including (but not limited to) The Professional Left, The LEFT Show, The Matthew Filipowicz Show, and Kicking Ass. In between I listened to Netroots Radio live. It’s a lot, I know, but I work long days and it’s good company. I was happy to become a paying member of all the shows which requested support. (I am, in fact, a “Certified Bad Ass”.) About six months in, things went off the rails.

Perhaps a bit more context will make it all make more sense. I grew up in one of the top five most liberal Congressional districts in the nation. My parents, now in their eighties, had me out walking precincts starting from the time I was about five. I’ve worked many elections but am most proud of the time I put in walking door-to-door with my LGBT friends to get Harvey Milk elected. Many years passed and my husband and I needed to move out of California in order to allow our small manufacturing business (hand-crafted but still considered manufacturing) to a state where the overhead would not kill us. We chose a lovely small town in the Midwest. Let me re-phrase, we chose a lovely but f$%#ing conservative town in the Midwest. The business flourished. We died a little inside. Eventually, I joined the Board of a gay chorus and that helped. Then, I found DailyKos and every day I thank the Great Bunny for that.

I do not use the term “Great Bunny” lightly. Several years ago, after having been in the Midwest for a while, I volunteered to bunny-sit the bunny of a friend of mine who, like me, was a member of the House Rabbit Society. She was going to be overseas for a year and her bunnies were not allowed to go. One of her two bunnies had no trouble being placed with a sitter. Not so with Arliss. Arliss was well-known to be an extremely precocious, difficult, disapproving bunny and not every bunny person is alright with that. I’m the opposite. I love the smart bunnies who know what they want and brook no fools. I was happy to add Arliss to our family for the year.

Arliss’ arrival, however, just happened to be coincident with my curiosity about this thing called blogging. (I was still more than a year from finding DKos.) I did not know if having a blog would be useful for my company. I decided I would practice but was uninspired about doing it in my own name. Instead, I decided to blog for Arliss. I figured that only her person and I would read it but that didn’t matter. I thought I was just practicing. I was wrong. Obviously.

Not too far in to blogging about rabbit things I started to blog about politics. It was a release, it felt great. Much to my shock, people started to write to Arliss from all over the world at her email address, ArlissBunny@gmail.com. Lots of bunnies from Japan and Europe but, later, during Arab Spring, strangely Arliss started to get emails from students in Egypt. I have absolutely no idea how that happened but, as you all know, the internet is like that.

So that is how things were when I was in my car one day and listening to Sam Seder, on The Majority Report, as he interviewed Dr. Stephanie Kelton on something called Modern Monetary Theory (MMT). I was fascinated. I went home and Googled. Hmmm. Everything I found about MMT, even the things that were supposedly written for beginners, assumed that the reader understood terms that I got the feeling I did not understand in the same way as the writer was presuming I did. Still, I really WAS curious so I put on my hard hat and hip-waders and waded in. I read about it whenever I could. I downloaded books. I bought actual hardcopy books. I highlighted like a crazy person. I took notes and cross-referenced. Eventually, it started to come together in my mind at which point Arliss took over.

It was her feeling that everyone needed to know about MMT, especially progressives. She suggested that I post not only at her normal blog, at WordPress, but also cross-post over at DailyKos. I had no choice but to obey. Amazingly, people read what Arliss had to say. I posted again. More people commented and I learned more with each exchange. Eventually, I posted about Platinum Coin Seigniorage and so many people got involved in that conversation that it became a “Recommended” post. I was thrilled. Arliss was non-plussed. Then people started asking for a book. I said, “no.” Arliss said, “yes.” A few weeks later, with the help of an incredible illustrator, Melissa Irwin, The Smart Bunny’s Guide to Debt, Deficit and Austerity made its appearance on Amazon as a Kindle book. Much to my shock (but not at all to Arliss’) the book has been selling steadily and has been well reviewed. Three more Smart Bunny Guides are in the works so that Arliss can add to the MMT offerings in her own idiosyncratic manner.

All of which brings me back to the radio because this past Monday, 23 December 2013, Arliss was interviewed by David Waldman on Kagro in the Morning! It is an amazing thing to me – the way information spreads and interlaces and grows and circles back around. I am having so much fun. …and I have all of you to thank, and Dave, and Sam, and Stephanie, and Melissa and, of course, Arliss.

*Ok, perhaps I was never exactly “normal.”

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I am writing an educational post today which will attempt to describe, in the simplest terms possible, Modern Monetary Theory (MMT) and its place in the current national conversation. I fully accept that rational thought will play absolutely no part in whatever agreement is ultimately reached in Washington, DC so that is not really at issue. This post will be neither political nor funny. I also feel obligated to provide this disclaimer. I am a member of the one percent. As a rabbit American of means, I live an exceedingly comfortable lifestyle which is seen to by my large staff. I have significant investments, including substantial holdings in carrot, kale and blueberry futures. Honestly, I couldn’t care less about the fiscal cliff because my every whim will be met regardless. I sense however, that not all of you are in a similar position. I know my staff thinks they have cause for concern. In terms of what lawmakers may decide to do, my staff is right. In terms of economics, they really are wrong. Allow me to explain.

In making my most critical, essential and earth-shattering point, I will try to be as subtle as I can.

The Federal deficit is not big ENOUGH.

There. I said it. Go back and read it again just in case you missed the emphatic nature of this statement. Got it? Oh, I see, not really. I suspected as much. Allow me to explain and to provide links to more experts on this subject than you will ever have time to read but really, really should because it is fascinating stuff. It is also important that I note here that MMT is politically neutral. It is not a proposal for fiscal policy. MMT is a description of the current monetary structure as it has been ever since the US went off the gold standard. That it is not widely understood is an understatement.

I attended the University at All-Bunny (SBUNY) and when I took macroeconomics the words “modern monetary theory” never crossed the lips of any of my professors. Later, as a grad bunny, I attended some evening lectures during which MMT was introduced but the theory was young and had not fully coalesced. I say this not because I think you care about where I first heard about MMT but because there is a reason you probably don’t know anything about it either. Either you, like me, matriculated prior to the advent of MMT or your professors, like virtually all those in the country, were not exposed to MMT during their training so they did not pass it on to you. Either way, MMT is only beginning to enter the general knowledge-base because it simply takes a while for new information to gain a footing especially in an area as staid as economics. Still, given the potentially society-changing negotiations going on in Washington right now, this seems a reasonable time to point out that no matter what they decide, they are likely to be wrong because, as anyone who has paid informed attention to the monetary crisis in Europe knows, austerity measures are a death knell for already stressed economies. Nation states that are locked into a fixed currency, like all those who participate in the Euro, have turned over the control of their economies to forces which have no interest in acting in the best interest of each individual country. But, and this is important, the United States is NOT in this position.

Fiat Currency

Once upon a time the US was the prime signatory to the Bretton Woods Monetary System wherein forty-four allied nations agreed to tie their currencies to the US dollar at a fixed rate. The US dollar was tied to gold. This acted, for a time, to stabilize world currency markets and pushed then much needed security throughout the system. Eventually though, because gold is a limited commodity, being tied to the gold standard began to seriously impinge upon the US economy so, in 1971 President Nixon, with the so-called “Nixon Shock”, took the US out of Bretton Woods and off the gold standard. This was a huge deal, bigger even than I can describe. The United States now had a pure, fiat currency (meaning that the currency does not, in itself, have intrinsic value) and that the US, as the issuer of said currency, had new and significantly increased power to make much broader discretionary decisions in terms of economic policy. But a funny thing happened. US monetary policy makers didn’t really do much with their new found freedom.

To begin to explain this I must first make something very, Very, VERY clear – a US federal budget is nothing what-so-ever like your personal household or business budget in any way, shape or form. It’s not. See – you aren’t getting this.

It…is…not…like…your…family…budget.

Period. Do you see why? You don’t do you. *sad face* Well, you are in good company. Most of the country and, to the best of my knowledge, every single member of the House of Representatives, is right there with you. Here’s a hint. You have to work for your money. A business has to produce goods, or services, or, if it is Bain Capital a vulture capital firm, steal money in order to have any. The US government is an issuer of currency. They don’t have to earn it. They print it. (Do NOT go to the “inflation” place yet. I’ll get there later.) Let’s just stay focused on the simple fact that the big difference between the US government and you or me is that they will never run out of the currency needed to cover their debts. (I KNOW. I’ll get to the inflation thing later. Stay focused.)

One of the most interesting things about fiat currency is that taxes are not actually a requirement. Neither is there a need to sell bonds or borrow currency. Do you know what happens when you pay your bill to the IRS in cash? They shred it. No joke. They make a note in their computers next to your account and then that cash is gone. Poof. The only real purpose of taxes is to drive value into the economy (see Sectors, below). Taxes are a way to move value back from the private sector into the public sector. Deficits are the opposite. Deficits are a way to leave value in the private sector. For example:

if the Department of Defense spends $100 buying a wrench than the private company that sold it to them, let’s call this company Schmoing, gets that $100. The value has transferred from the public into the private sector. If Schmoing than turns around and pays their wrench supplier, ACE Hardware, $15 for the wrench, $15 of the value transferrs to ACE and $85 stays with Schmoing. If ACE than turns around and pays the actual maker of the wrench, a firm in China called Wrenches!, $5 for the wrench than $5 of the original $100 has now moved outside of the US economy. When tax time rolls around, Schmoing and ACE both pay taxes against the profit they made on the sale of the wrench. ACE pays $1 and …now here you know this is just imaginary because in the real world Schmoing would pay nothing…but back to the story, Schmoing pays $9. So, of the original $100, the government received $10 back in taxes and $5 went out internationally (to China) leaving an $85 federal deficit but that money didn’t evaporate. It is still here, in our economy, in the private sector, which is where we all agree we want to keep the majority of the assets of the country.

Sectors

Just as math is math, accounting is accounting. There must be balance in the balance sheet. Understanding that the balance is more macro than we commonly think is why it is so difficult for us to accept that a federal deficit is a good thing. The federal government isn’t balancing a federal budget – they are balancing an economy. These are very different things. If they were balancing a budget, like certain legislators keep insisting is a necessity, than the worry would be that income (taxes) and outgo (government spending) are balanced. This is way,WAY TOO SMALL A VIEW and it’s wrong.

Our economy is divided into three sectors and it is these sectors which need to be in balance. The three sectors are the private sector (individuals and business), the public sector (local, state and federal governments) and the non-domestic sector (foreign individuals and businesses, domestic monies which get moved into foreign tax shelters, and foreign governments). As always in accounting, one sector’s asset is another sector’s liability. This is seen in the example given above when the $90 liability of the public sector becomes the $85 asset of the private sector and the $5 asset of the non-domestic sector. MMT has, therefore, two rules: all sectors cannot be in surplus at the same time and all sectors cannot be in deficit at the same time. Accounting has these same rules. This is nothing new.

As we all know all too well, the private sector cannot last for long in deficit without the economic consequence of recession becoming apparent. Likewise, at least in the US economy, we are not going to be without a trade deficit any time soon. I’m pausing here so you can all stop on the tracks and pay attention to the gigantic epiphany train that is about to mow you down. Yes, people, if we don’t want the private sector to be in deficit and we can’t have the non-domestic sector in deficit than the only option is to have the public sector run a deficit. It’s a basic principle of accounting. It isn’t complicated.

It just isn’t what we have been taught. We have been taught to view the US budget as if it were separate of you and I, an independent entity which required internal balance. Instead, MMT proves that the public and private sectors are two of the three legs upon which this meta entity, the US economy, stands. So when you hear legislators scream about a deficit or you see a Tea Party protestor carrying a sign that says “Say NO to Socilism” on one side and “Don’t Mortage My Daugters’ Future” on the other side (after you get done laughing at the spelling) the response to this is simple – better you than me because you, meaning the US Treasury, can issue currency as you need it and I can’t.

So why are Italy and Greece in so much trouble with their deficits? That’s obvious. Neither country has control over its currency. Currency itself is, indeed, limited and has become, essentially, a commodity. In the overall European Union ecosystem, essentially, Germany has boomed at the cost of Greece and Italy. It’s that balancing thing again. Still, it’s easy to think of it this way. In the mid 1990’s, Italy had approximately X debt. They were not in crisis. They were a fully functioning economy and they paid their debts in Lira. Today, Italy also has X debt. Notice that this is the same amount. they are not any further in debt than they were but suddenly it is a debt crisis. Why? Well, it’s the Euro, of course. Italy is at the mercy of the Euro and there is no advantage to the Euro in favoring Italy so Italy is drowning under a bad debt they cannot pay with limited Euros.

What we want here in the US is what MMT theorists refer to as a good deficit. A good deficit is one which operates in an unconstrained way in terms of time and arbitrary limits. By contrast, fiscal austerity is deficit by design. Fiscal austerity directly impedes the growth of the private sector. New wealth is only created by the issuing monetary authority. Here, stand on this other train track while I explain this part. (Pay no attention to the giant locomotive that is moving in your direction.) I’ll return to the previous example.

Let’s say Schmoing sells that $85 wrench to Borthrop-Humman instead of the federal government. The value has passed from Borthrop-Humman to Schmoing but it remains in the private sector. It is not new wealth it’s just recycled. Even if Schmoing built the wrench from scratch, all the components were purchased from within the private sector and on the balance sheet the value still remains there. None of it is new.

BAM! *splat* *train wooshes by* Yeah, I know. I felt that way too. I always thought that because we built the thingie we were creating the wealth. My bad. I forgot that we may be building the thingie, the wrench in this case, but it has no monetary value. There is no money to pay for the wrench unless the issuing authority has issued said currency into the system and that can only be done by taking less out in taxes and/or pushing more in with government spending.

Professor Stephanie Kelton, Research Scholar at the Levy Economics Institute and one of the leading authorities on MMT has this to say,

So, let’s focus in on a specific period of time. The period in the late 1990s and early 2000s when for the first time in decades the US government ran budget surpluses…. Many people would inherently think that would be a good thing. It shows fiscal responsibility. Not only did they balance the budget, but they put it in surplus. Meanwhile, our current account deficits were huge. The rest of the world was running large positive balances against the US. That reduced US private-sector savings. Surpluses fell. It pushed the private sector into deficit on an unprecedented scale. The private sector went from surviving above the zero line to being pushed below zero. And the private sector remained there for a period of years, spending more than its income, borrowing to do it. And it was all fueled by a massive bubble economy that ended in recession, which drove the public sector’s balance back into deficit where it belongs.

When an economy is already in recession what it needs most desperately is new wealth and, with a fiat currency, that can only come from the issuing authority.

Inflation, Currency Exchange Rates and Unemployment

When was the last time your foot hat the flu? That’s because the flu is systemic. When one part of your body has it, your whole body has it. When an economy is in recession, it is systemic. Everything is effected. It is a meta problem. The odd thing about the US is that we have made choices to try to resolve our crisis without using the single most powerful weapon we have at our disposal. With any fiat currency there are only three things to watch for and none of them are deficit spending. The three economic delimiters are inflation, exchange rates and unemployment. As you can see, these things relate, directly, to each of the sectors.

In the past, deficit hawks and doves alike have tried to assail MMT theorists with the inflation argument. Just within the last three years some of the biggest names in economics, including some of the leading economic advisors to the US Department of Treasury and the Fed, have come to realize what MMT theorists have long known. If you are the issuer of the currency, you do not have to be at the mercy of bond vigilantes. As I said many paragraphs back, the US does not need to sell bonds or borrow currency in order to spend. These are habits and levers we employ as part of fiscal policy but they are not a necessity in terms of financing expenditures. It is interesting to know that the Secretary of the Treasury can order to be struck the currency of his choosing and deposit it in the federal accounts. Just like that. Congress would melt down in a fit of apoplexy, but it would be legal. The money gets injected into the economy and people go back to work. In fact, it would be easy and fast to open up the spigot and return the economy to “full” employment (approximately 3.7% unemployment) within the next two or three years at the most. An economy only gets inflationary, too hot, if new wealth continues to be pumped into the economy after the employment goal is achieved. Up until that time, provided there are no exigent commodity constraints, the supply remains in excess of the demand so inflation does not become a factor.

Again, from Professor Kelton,

Cash registers don’t discriminate. When you spend money in the economy there isn’t someone on the other end saying, ‘will that be public or private today?’ A dollar spent is a dollar spent. The federal government could SAFELY lower taxes, increase government spending, allow aggregate demand to increase.

Inflation is when demand outstrips supply. In the 1970’s this was because there was a sudden commodity shortage. The supply of oil was choked down to a trickle by the newly formed OPEC. Every product that used petrochemicals was effected. Trucks used to transport food needed expensive gas to get cheap lettuce transported across the country. The price of carrots went through the roof. Americans, with their huge gas-guzzling cars, waited in lines for gasoline. The economy could not take the shock. Unemployment rose at the same time prices spiked. Stag-flation was the new buzzword. This period is a classic example of what is called “demand-pull inflation.”

Money is not a commodity. It is not intrinsically limited. It is in no way comparable to oil (or gold). There is no reason that the US government should not be spending money to drive employment. The US dollar is not at risk of major devaluation and both short and long-term bond rates are at or just barely above zero. In other words, no one anywhere thinks the US economy is at risk of not being able to make its loan or bond payments. This is because all the investors, foreign and domestic, know that we are in full control of our currency. They are not at risk.

Final Thoughts

We have all become comfortable with viewing the federal budget just as we would view one small part of a much larger elephant. We each imagine that the “wall” or the “rope” that is in front of us is the whole thing. We each think it looks much like our personal budget only on a bigger scale. In fact, the meta whole is orders of magnitude larger and that entire pachyderm is sitting on a train that is, once again, headed right for you.

Over the next few weeks and months, the President and legislators from both Houses are going to be fighting over an imaginary “crisis” they have dubbed the fiscal cliff. This battle is entirely unnecessary. Our leadership is so used to thinking in terms of the gold standard that they still don’t know that a whole new age has dawned. The emphasis of MMT is in the power of the State to move within a substantially increased policy space which is largely unconstrained by monetary limitations.

For my part, I’ve told you about it. For your part, please pass this information on to your legislators and to anyone else you know. Post it on your Facebook page. Design a bumpersticker. Just don’t stay quiet.

I’ve digested quite a bit on MMT in recent weeks. I even read some of it before I ate it. A lot of what read really gets down into the weeds but some was quite accessible and can be found in the following places:

Republican FAIL

Sure, there are a smattering of GOP pundits talking about substantive changes in message but they are being drowned out both by those who have been unable to get past loudly blaming Mitt Romney for being a candidate who daily demonstrated all the backbone of a windsock and the rest who are madly zeroing in on a few surface issues. Have faith, none of them will get to the core of their problem for three BIG and PAINFULLY OBVIOUS reasons which, of course, the entire bubble-based GOP will overlook and into which Dick Morris will likely do another faceplant.

I will summarize here:

1. If you don’t respect differences and people in general, your policy will reflect that and those people will (eventually) notice.

2. They built it, a base of angry, terrified, white, bigoted, evangelicals who aren’t going to change…ever. It’s going to be impossible to work these folks into a “big tent” platform and waiting for them to die will take a while.

3. Citizens United isn’t really a friend of the GOP. Corporations are their own friend, first, last and always. Corporations will spend accordingly. The demo has now made a huge swing in the direction of the Democrats. Corporations have made a note. They won’t be betting exclusively on the GOP to win from here on out.

The GOP did build a “nuclear option” but they aimed it at themselves because these guys really weren’t kidding, they believed their own spin. Karl Rove’s melt down on FOX News, which will live on in infamy, or, my personal favorite, Mary Matalin’s epic FAIL on CNN, wherein she spends the entire time looking like she just swallowed a fly, are both perfect examples of a simple truth. The GOP had no idea that their message was not landing. They have been locked in their own echo chamber for too long (too long, too long, too long…). As it turns out, only eternally pissed-off white men and a narrow majority of married white women think that a platform of “I’m entitled and the rest of you can go screw yourselves,” is an appropriate way to run a country. The rest of the electorate thinks that things like having a strong and well-coordinated FEMA during a major national crisis, as opposed to a few people handing out canned goods here and there, is essential to maintaining a strong and vibrant nation.

Dems Fail

Still, there are things the Dems should be learning from all of this. (Though, given the fact that we have had Karl Rove, the Dark Lord and Master of the first two items noted below, on our ass for multiple elections and still have not managed to learn these lessons, I am somewhat lacking in hope.)

1. Narrative matters. Yes, our kith and ken all worship at the alter of reality-based information but we tell our story terribly – really, really terribly. President Obama had a strong first term and even now almost no one knows that. Hello! Short, simple, glossy, heartwarming narrative. I mean seriously, people, the very best narratives of this election were provided by the other guy including Big Bird, the pre-1917 Navy and, the corker of them all, the 47% video. Y’all have a year and a half to figure this thing out. If you do, we have a shot at taking back the House and then running the tables for two years.

2. Naming Shit Stuff. WOW. We are so very, very bad at this. The “Affordable Care Act” – really! Who thought of that? The GOP is a superstar at naming stuff. “Pro-life,” “Obamacare” and “Defense of Marriage Act” these are works of art. Can we please hire one damn Mad Man from Madison Avenue to handle this for us? Where is Don Draper when you need him?!?!?!

3. Self Doubt. During the weeks leading up to the election Republicans were sure they were going to win and Democrats were sure they were going to lose. Dems are genuinely bad at knowing when they have the upper paw and then taking advantage of that fact. Dems are also bad at being who they really are. For years the party has been moving to the right while the country, the electorate, has been moving left on issues while still voting right because *facepalm.* Democrats need to be Democrats.

Democrats have allowed the GOP to run away with the individual freedoms narrative but the fact is that individual freedom is exactly what Democrats support and Republicans oppose on almost every level. Democrats also support the strength of community. These things are not mutually exclusive. Republicans want the world to be either this or that. Democrats understand that there can be a balance where both exist together. (Though, I have to say, in a tip of the hat to BlueGal and DriftGlass, there are not two sides to facts and presenting so-called “balance” on matters of fact is when the media needs to be taken out to the Internet Kitty litterbox and firmly rolled in the material therein.)

On election night all the networks showed coverage of the crowds at the Obama and Romney headquarters. The Obama crowd was all ages, ethnicities and socioeconomic groups. It was all of us. The Romney crowd was white and, based upon the outfits seen on the women, sorely in need of fashion advice. I also think that removing the sticks from up their posteriors would be helpful but that’s really a personal decision.

The Last Word(s)

And finally, that moment for which you have all been waiting, the gloating. These are my favorite thoughts on the subject.

• If you are one of those thinking is that God is involved in each and every little thing that happens to us than His choice is pretty obvious – the black, Kenyan, anti-colonialist, Muslim, socialist, communist, WON. Hahahahahahahaha!

• I’m sending a special “thank you” out to those on the Team Romney who designed Orca, their beached-whale-fail of a get out the vote app . I’m glad those bottles of tequila I sent over while you were in the programming stages proved to be effective. You are welcome.

• Speaking of voting, Florida doesn’t get to vote anymore. They must now turn in their electoral college votes and move to the back of the line, behind Wyoming.